Case Study Barriers to Entry and Monopoly by Alcoa

Name: Bhavani Singh Rathore

141206

Roll No:

Managerial Economics

Summary of
Case Study Barriers to Entry and Monopoly by
Alcoa.

CASE STUDY SUMMARY

Case Study Barriers to Entry and Monopoly by Alcoa

Alcoa Inc. (from Aluminum Company of America) is the world's third largest
producer of aluminum, behind Rio Tinto Alcan and Russias Rusal, with
corporate headquarters in New York City. Alcoa is a classic example of how
monopoly was created and maintained for 50 years. Alcoa was successful in this
because of various strategies it adopted to maintain monopoly power.
In the late nineteenth century,
Alcoa had its first taste of Monopoly when it acquired a patent on the new method
developed by it to remove oxygen from bauxite to obtain aluminum, which
precluded other firms in the industry from using it. Thus giving it a competitive
advantage over other firms in the industry. This patent expired in 1906, however by
then Alcoa had already patented another effective method to produce Aluminum in
1903, thus continuing its advantage over other firms which lead it towards
monopoly power.
In 1909 when Alcoas patent expired, by then it had
already on its way to control the supply of bauxite to America which was
required to produce aluminum. It signed long term contracts with producers of
bauxite prohibiting them to supply bauxite to any other American firm, it entered
in agreement with foreign producers of aluminum not to export aluminum to each
others market and it went as far as purchasing electricity only from those firm
which agree not to sell electricity to other aluminum producing firms.
It was a major setback for Alcoa when courts in 1912
invalidated all the contracts and agreement. But because of the monopoly power it
had over the previous decade, Alcoa had grown in to a large organization and by
expanding productivity is was able to retain Monopoly due to economies of scale.
Economies of scale helped it to match supply with demand and Pricing aluminum
at low cost which could not be matched by other firms and also discouraged new
entrants from entering this industry.
The end to monopoly power of Alcoa came after World War 2 (1945), when Alcoa
was not allowed to purchase government financed world war built during the war.
This gave rise to two new competitors- Reynolds, kaisen in aluminum industry.
The Aluminum industry was yet to witness an
International monopoly (cartel). This happened decades after the Alcoa had lost
its monopoly power. It was during the early 1990s when Russias internal demand
by its military and industrial complex vanished after the collapse of communism.
Russia had a sharp increase in the exports of aluminum which led to oversupply in

Case Study Barriers to Entry and Monopoly by Alcoa

the market, thus reducing the price of aluminum by almost 50 percent. In response
to the collapse of price due to excess supply, representatives from major aluminum
exporting nations (USA, European Union, Russia and other) agreed to voluntarily
cut the production of aluminum to reduce the supply and increase the price of
aluminum.
Alcoa though does not enjoy the monopoly power now it is still a significant player
in the aluminum industry. On May3, 2000 Alcoa acquired Reynolds Company thus
remaining the worlds largest player of aluminum. In 2007 it had revenues of $ 30
billion and had control over 16% of the worlds aluminum market. The merger of
Rio Tinto of Britain and Alcan of Canada, however created the largest aluminum
company in world, Russias rusal became second leaving Alcoa third.
Monopoly in an industry can help a firm to earn above
average short run as well as long run profits which is not possible in other perfect
competitive market. It also gives the firm the advantage to decide the supply of
product in the economy thus affecting its price. Thus many firm try to develop
strategies which could provide them monopoly in the market. The four basic
reason that could give rise to monopoly are Control over raw material, economies
of scale, government franchise and patents & copyrights. Alcoa was able to create
and maintain its monopoly by adapting different strategies like patent of effective
methods of production developed by it, by entering into agreements and contract to
get control over raw materials(though illegal in this case) and economies of scale
by expanding production capacity of aluminum. This strategies played a major role
for monopoly of Alcoa in Aluminum industry.